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Why speculative miner Australian Bauxite Ltd soared 10% today

I first bought shares in Australian Bauxite Ltd (ASX: ABX) (“ABX”) in September last year.

At the time, I liked the high quality of its tenements, its nearness to production, the attitude of management, and the macro factors working in favour of bauxite miners. At the same time I was also cognisant of the risks, some of which, e.g. increased supply in other nations and a decline in aluminium prices, have come to pass.

In return for funding the development of its mine, Australian Bauxite formed an agreement with Noble Resources that saw Noble lend it the money in return for the rights to buy and distribute ABX’s bauxite.

I felt that the agreement was unfavourable and that ABX was disadvantaged in negotiations by its status as a speculative explorer.

However, as it turns out, Australian Bauxite announced this morning that “as a result of successful fundraising in November 2014 and as a result of capital costs coming in 45% below budget, ABX has raised sufficient funds to obviate the need to draw down funds under the proposed Loan Facility and the Term Sheets came to an end on 30 June 2015.”

‘Term Sheets’ are a set of broad agreements that guide two parties’ interactions while they finalise a binding agreement. As I understand ABX’s announcement, due to an inability to finalise a mutually-agreeable arrangement and as a result of being able to fund development itself, ABX has decided to go it alone.

This decision is supported by the establishment of a long-term off-take agreement (also announced today) that will see ABX send its first shipment of bauxite into China later this quarter.

While the details of the agreement and the off-take partner are withheld as ‘commercial-in-confidence’, the arrangement is a step towards vindicating the initial confidence I felt in Australian Bauxite.

Bauxite sales at today’s prices should see the company making decent margins and I continue to hold my shares in the belief that the company will reward shareholders well over the next few years.

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Motley Fool contributor Sean O'Neill owns shares of Australian Bauxite Ltd.. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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